Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 70-27

1970-1 C.B. 83

Sec. 381

IRS Headnote

The taxable year of a transferor ends on the date when it transfers all of its operating properties, except cash retained for later payment of franchise tax, director fees, and expenses of dissolution, in a transaction qualifying as a reorganization.

Full Text

Rev. Rul. 70-27

Advice has been requested as to the "date of transfer" of assets in a corporate reorganization, under the circumstances described below, for the purpose of determining the end of the taxable year of the transferor.

Substantially all of the properties of M, a domestic corporation, were acquired by X, a domestic corporation, in a transaction qualifying as a reorganization described in sections 368(a)(1)(C) and 381(a)(2) of the Internal Revenue Code of 1954.

Pursuant to the plan of reorganization, M on May 31, 1968, transferred all of its properties to X, except an amount of cash retained by M solely to pay a franchise tax, directors' fees, and expenses of dissolution. Excess cash, if any, remaining on the dissolution date (December 31, 1968) was to be transferred to X.

After payment of the franchise taxes, directors' fees, and dissolution expenses, M transferred the remaining 10x dollars to X and dissolved on December 31, 1968.

The specific question presented is whether the taxable year of M ended May 31, 1968, notwithstanding that some cash was retained by M for later payment of franchise taxes, directors fees, and dissolution expenses. This, in turn, involves consideration of whether the cash retained is property required to be transferred pursuant to the reorganization.

Section 381(b) of the Code provides, in pertinent part, that, except in the case of an acquisition described in section 368(a)(1)(F) of the Code, the taxable year of the distributor or transferor corporation shall end on the date of distribution or transfer and that the date of distribution or transfer shall be the day on which the distribution or transfer is completed.

Section 1.381(b)-1(b)(1) of the Income Tax Regulations provides, in part, that the date of transfer shall be that day on which are transferred all those properties of the transferor which are to be transferred pursuant to a reorganization described in section 381(a)(2) of the Code.

The tax results of reorganizations depend less upon the form of the transaction than upon the economic integration of two or more separate businesses into a unified business enterprise. The transferee steps into the "tax shoes" of the transferor. See House Report No. 1337, Eighty-third Congress, at page 41. Thus, the transferee is deemed to step into the "tax shoes" of the transferor as soon as is practicable as a result of the reorganization so that the carryover of the items enumerated in section 381(c) of the Code may be taken into account in regard to those items or properties that are to be transferred pursuant to the reorganization.

In the instant case, all of the properties of M that concerned the operation of its business were transferred to X on May 31, 1968, and only an amount reasonably necessary to pay its obligations and expenses of dissolution was retained by M after May 31, 1968. The amount to be transferred to X, after payment of franchise tax, directors fees, and dissolution expenses was an amount subject to a condition subsequent and, as of May 31, 1968, there was no certainty that any sum would be transferred to X. Thus, the cash retained is not property to be transferred pursuant to the reorganization within the meaning of section 1.381(b)-1(b)(1) of the regulations.

Accordingly, it is held that all of those properties of the transferor that were transferred pursuant to the reorganization were transferred on May 31, 1968. Thus, the taxable year of the transferor ended on May 31, 1968.